Commercial Bank Operational Risk Management

Currently, the Market risk, credit risk and Operational risk are themajor risks which the commercial banks have to faced, and theOperational risk is the most important.In order to supervise theoperations of the commercial banks effectively, and increase the ability ofcommercial bank to resist risks, national agencies require commercialbanks to extract capital reserves to the risks they have to face. So how toconduct an effective operational risk measure is with the significance ofthe study.Loss distribution approach is the most complex method to measurethe operational risk loss, but also the most sensitive and effective. Andnow, the studies of loss distribution approach are based on the assumptionthat the frequency and intensity do not vary with the passage of time.However, we know the purpose of the commercial banks to manage risksis not only to calculate a risk reserve, but also to conduct effectiveimprovements to reduce loss. And the improvements are certainly basedon the past information, so we believe that the loss of next year must berelated with the loss information of last year. So what is the correlationbetween two adjacent loss, how to describe their correlation, these are the main content of this paper. In this paper, we will elicit correlationbetween annual loss by the correlation between the annual loss frequencyor severity firstly, and then we get the Conditional distribution of the loss,at last we can get the VaR.